In short, it depends! You might pay your staff extra money for things that aren’t part of their usual wages or salary, such as a travel allowance. Depending on the circumstances, some allowances are taxable and others are tax free.
If you’re registered for GST, you can claim GST credits on reimbursements paid to employees for business expenses. You can’t claim GST on any allowances paid to employees that aren’t reimbursements for employment-related expenses, or those paid for their private expenses.
You need to have the paperwork to prove your payments meet any tax-exemption standards, so the standard record keeping rules apply.
You can provide these allowances to employees to help cover the costs of meals and clothing they have to buy as part of their job. They're usually tax-exempt.
Examples of common tax-free meal and clothing allowances include situations such as:
- Giving your employee, Sophie an allowance when she has to work away from your company's office
- Giving you employee, Vanisha an allowance towards a pair of nice work shoes every year
Generally, if you provide accommodation or an accommodation allowance to an employee, it's taxable via PAYE, but tax isn't paid on all accommodation allowances.
Tax-free allowances include accommodation payments when:
- Your employee is attending a work-related meeting, conference or training course that requires them to stay overnight
- Your employee is working somewhere they can’t easily travel to every day, e.g. on secondment.
There are also accommodation allowance tax exemptions for Canterbury earthquake reconstruction projects.
You might pay cash allowances to an employee for travel between home and work, this might be tax free if the amount paid reimburses an employee's additional transport costs, and there are one or more special circumstances, such as:
- Working overtime, shift or weekend work that is outside their normal hours.
- Carrying work-related tools and equipment, e.g. the employee usually takes the bus to work but must use an Uber or their own vehicle to transport work-related gear.
- Travelling to do something you need done for your business (e.g. drop off files to a client)
- A temporary change in workplace
- There's no adequate public transport system serving their workplace - note that only the first $5 of the daily travelling allowance is taxable. Any additional amount is tax-free.
You can use IRD's mileage rates if the actual cost per kilometre is not available.
You might give your employee a regular payments made in addition to their actual salary or wages to go towards some type of benefit, these are taxable as PAYE is taken off these payments since they are paid along with your employee’s wages.
Examples of benefits might include:
- A food allowance to the canteen so your employee Celia can buy lunch at a discount
- A clothing allowance you give Nickie to buy nice work shoes (that aren't a uniform) once a year
- Giving Tim free or subsidised board (e.g. a cheap farm cottage) so he can live close to work
If an employee pays for something out of their own pocket, you’ll need to reimburse them for the cost - this is usually for things like paying them back for the cost of lunch when they've had to work away from their normal workplace.
They can either provide you with receipts for anything they pay for, or you can make a reasonable estimate of how much they should be paid back.
You'll generally pay your employee back in their next pay, and add it to their net salary after their PAYE has been taken out. You don't pay tax on reimbursing allowances (unless you pay back more than the employment-related expense — then the difference between the employment-related cost and what you pay is subject to PAYE).
If you have any questions you can email us at firstname.lastname@example.org or call 0800 555 024